Underweighted portfolios are investments controlled by an investor that appear to account for less of the portfolio than current market conditions warrant. This is in contrast to an overweighted portfolio, where an investment accounts for too much of a portfolio based on current market conditions. The key is comparing the percentage of investments that are connected to various industries within the overall makeup of the portfolio.
Some components of the underweighted portfolio will be considered too few in numbers when compared to the other components found within the roster of investments. While the underweighted situation may be intentional and can sometimes be a practical strategy, the existence of an underweighted portfolio is commonly a sign that the investor needs to make some changes in order to achieve a more desirable balance of investments.
Understanding the concept of an underweighted portfolio requires taking a look at the typical investment portfolio. In general, an investor will usually attempt to diversify his or her investments into wide range of options. This strategy can help to prevent the overall worth of the portfolio from dipping sharply in value when a particular market sector experiences a downturn. Many investors choose to balance out with more or less equal percentages of options that involve several different investment types.
For example, a given stock portfolio may contain stock options related to the retail industry that total thirty percent of the total investment. Another twenty-five percent of the portfolio may be devoted to technology. Twenty percent is allocated to manufacturing, while ten percent is focused on defense.
Depending on current market conditions, a broker may consider the portfolio to be underweighted, because defense is booming right now while retail is going through a long-term slump. With this in mind, the broker may recommend that the investor sell off five percent of the low yielding retail stock and use the funds to increase investment in defense by that five percent. This would help to create a balanced portfolio that is responsive to the short term and long term projections of the performance of the market and will benefit the investor in the long term.
At the same time, an investor may choose to intentionally carry an underweighted portfolio. This could be due to a personal projection that a given market that is currently in a slump will ultimately turn around and yield a substantial return. To that end, the investor may choose to carry a higher percentage of stock options associated with that industry and quietly sit on them. While this means the investor makes less money by holding a higher percentage in low performance stocks, the situation changes drastically when those underperforming stocks begin to rise dramatically. By choosing to maintain an underweighted portfolio for a period of time, the investor ultimately carries the day.
